Adjudication: caught in the Act?

Friday, 09 July 2010 00:00
Bond Pearce

Anyone not involved in what might be regarded as the mainstream of the construction industry (whether as a building contractor or someone who regularly employs one) would be forgiven for thinking that a dispute resolution procedure introduced to rid the industry of some of its historical problems is of no relevance to their business.

So it may come as a surprise to the wider business world to find out that it is still possible to be caught by the Housing Grants Construction and Regeneration Act 1996 (the 1996 Act), which came into force on 1 May 1998. In-house counsel, property directors, facilities and operations managers, and anyone who is responsible for preparing or letting contracts that involve works or services, would be well advised to familiarise themselves with the 1996 Act, which has been the subject of several criticisms and reviews. The 1996 Act will be amended if and when the Local Democracy, Economic Development and Construction Act 2009 (the 2009 Act) comes into force. However, no date has been set for the commencement order that would be required to bring the 2009 Act into effect.

The 1996 Act has also been the subject of several hundred cases in the courts, most of which have arisen from claims to enforce adjudicators’ decisions and many of which are the result of a long debate about whether the 1996 Act applies to an agreement in the first place. Much of this debate comes about because of the complicated language that the 1996 Act uses to bring some agreements within its grasp and exclude others.

Are your agreements covered by the 1996 Act?

Essentially, both the 1996 Act and the 2009 Act apply to construction contracts. You might stop there, comfortable in the knowledge that you are never likely to be involved in a construction contract, but watch out, as the definition of a construction contract in the 1996 Act is very wide and could apply to arrangements that, at first glance, might not appear to be covered. As well as traditional building works, s105(1) of the 1996 Act applies to:

agreements with a wide range of consultants (for example, an instruction to an adviser to look into the possibility of revamping an office, investigate the suitability of a new site or carry out a survey as part of the management of a company’s property portfolio);

maintenance arrangements for a company’s building, such as the annual check up on the head office’s air conditioning systems or electrical installations;

agreements to install heating, lighting, ventilation or power in a building;

the sprucing up of your premises by painting or decorating works;

site clearance works; and

possibly (depending on their precise terms), letters of intent, which are often very widely used to instruct a contractor to get on with the job while the full set of contractual documentation is sorted out.

However, there are many exclusions, some of which are not altogether logical. The 1996 Act does not cover:

tunnelling and boring operations;

the manufacture or delivery to the site of certain plant, materials and machinery;

contracts with a residential occupier;

contracts in the top tier of Private Finance Initiative arrangements (although contracts lower down the order would be caught); and

section 106 (planning) agreements.

So working out in the first place whether an arrangement might fall within the statutory definition is not at all easy. As a starting point, the primary purpose of the agreement needs to be looked at. At its core, are we talking about what might be classed as the carrying out of construction operations or is that only a secondary function? For example, an agreement to find a jobless project manager an assignment would probably not be caught because it is primarily about finding work rather than carrying out construction services. The distinction is not always particularly easy to draw.

The ‘in writing’ issue

Once an agreement has been reviewed and identified as being caught by the 1996 Act, there are several other requirements to consider. For example, although this would change in the 2009 Act, s107(1) of the 1996 Act states that the contract has to be ‘in writing’. However, deciding what might at first appear to be a relatively simple issue becomes very complicated.

The common exchanges of pre-contract enquiries, quotations, correspondence and meeting minutes might be sufficient to create an agreement in writing for the purposes of the 1996 Act. Where tender documents have been issued and an oral instruction given to start work, the contract is unlikely to be enough to make the contract in writing. However, following Connex South Eastern Ltd v MJ Building Services Group plc [2004], an oral instruction that has been recorded in the minutes of meeting probably would be regarded as being in writing.

Further complications may arise if there is a written contract which is then varied by an oral agreement. Does that mean that there is a right to adjudicate under the expanded arrangements? The answer may well be that the original written terms will be governed by the 1996 Act but the later oral change will not. Each situation would have to be looked at individually to establish whether it falls under the 1996 Act.1

If the agreement is covered, what are the consequences?

If the agreement qualifies as a construction contract under the 1996 Act, each party to it has the right to adjudicate. That right cannot be excluded, even by agreement between the contracting parties, and if the contract does not include a 1996 Act-compliant adjudication procedure, the Scheme for Construction Contracts (England and Wales) Regulations 1998 will be implied into the contract.

The right to adjudicate can also be exercised at any time, including during or after termination of the agreement. The adjudication can cover any dispute under the agreement, whether this is a contractor’s claim for payment, an allegation of defective work or a complaint of professional negligence.

What does adjudication look like? Quick and binding!

Probably the main feature of adjudication is its speed. One of the original intentions of the 1996 Act was to provide a speedy and cost-effective means of nipping disputes in the bud, with the hope that the parties could then get on and concentrate on the job in hand. Accordingly, the adjudicator is required to reach a decision within 28 days of proceedings commencing.

How adjudicators get to that decision is broadly down to them. Typically, the process will involve the referring party getting the adjudicator appointed within a day or so, and sending them all the documents on which that party wishes to rely, alongside a submission in reply from the responding party. Usually, a response from the referring party and a decision will follow within the 28-day period.

Many adjudicators decide to deal with the dispute on paper, restricting what they consider to written submissions and, possibly, witness statements. However, in appropriate circumstances there is no reason why there should not be site inspections, expert witnesses, formal disclosure processes and many of the features of a full hearing before a court or arbitration panel.

The adjudicator’s decision on the dispute is binding on the parties and there are only very limited circumstances under which it can be challenged. There is no appeal and, even if the decision is wrong, it can still be enforced.2 If there has been a breach of natural justice in the adjudication process or the adjudicator has acted outside their jurisdiction, the court may stop the decision from being enforced. Otherwise, a judgment supporting and reflecting the adjudicator’s decision will be given very swiftly.

So the scenario you could face is a notice landing on your desk on Monday morning, an adjudicator being appointed on Monday afternoon and a requirement to answer in detail (possibly within a week or so) a claim that might have come out of the woodwork from a contractor that you have not heard from for months or even years.

Changes in the 2009 Act

There are several ways in which the new Act will change the original. The tight timescale is not one of them.

One of the major changes introduced by the 2009 Act is the removal of the requirement for construction contracts to be in writing, so the right to adjudicate will apply to all such contracts, whether they are written, oral or both. This is likely to mean that an increasing number of arrangements will be caught, with the probable consequence that more disputes will be referred to adjudication. It is likely that this will result in more cases ending up in enforcement actions before the courts in the event of a party failing to honour the terms of an adjudicator’s decision.

Adjudications under the 2009 Act may also have the added complication of establishing the terms of a purely oral agreement. If there is a straightforward conflict between the parties as to what was said about the terms of a purely oral agreement, the adjudicator will have to carry out the potentially tricky exercise of deciding who to believe.

Some practical tips to avoid (or at least survive) an adjudication

There is no opting out of the 1996 Act but the following practical measures can be taken to prepare for the process of adjudication.

Get the right contract in the first place

Many standard forms of contract contain express adjudication provisions but certain projects do not fall under the 1996 Act because, for example, a residential occupier is involved or the works (such as shop-fitting) are excluded. In these circumstances, you could consider adapting the contract to remove the adjudication provisions altogether.

Even if the contract is caught, as long as it contains what the 1996 Act says it should, the adjudication procedure can be tailored to fit, perhaps by naming the adjudicator in advance or restricting the length of submissions.

Deal with the notice quickly

There is a compelling need to react very swiftly when a notice of adjudication is received and, as well as getting legal assistance, insurers may also need to be notified. There are many examples of a party not responding to a notice until it is too late.

Allocate time

Because of the truncated nature of the process, there is often an intense period during which there can be a serious drain on management time, with personnel having to be taken off the job to assist with the prosecution or defence of an adjudication. Therefore steps need to be quickly taken to identify who is going to assemble the information needed and deal with the day-to-day commitment.

Budget

There will be a costs burden. The adjudication process is not cheap and it is very rare that an adjudicator will ever have the power to award one party to pay the other’s legal costs. The adjudicator will also charge for their own fees and expenses, for which the parties remain jointly liable (although they are usually directed to be paid by the unsuccessful party).

Comment

It would be preferable to end with a positive message that this is a situation in which a new Act will cure many of the ills of the old. Unfortunately, that is unlikely to be the case. Many, if not more, agreements will be caught if and when the 2009 Act comes into force, and it will be no easier to work out whether an agreement will be covered.

The best advice is to be aware of the risk that agreements might be caught and be ready to react swiftly if it looks like a dispute is brewing.

By David Skelton, partner, Bond Pearce LLP.

E-mail: david.skelton@bondpearce.com.

notes

See Carillion Construction Ltd v Devonport Royal Dockyard (No 1) [2003], in which the adjudicator had no jurisdiction to decide whether an oral agreement varied the written consent.

See Bouygues (UK) Ltd v Dahl-Jenson (UK) Ltd [2000], in which an adjudicator’s decision was enforced even though it was agreed that he had made an error in mistakenly releasing retention.